(Updates with official close; adds comments, details)
TORONTO, Dec 11 (Reuters) - The Toronto Stock Exchange's main index plunged more than 200 points on Tuesday as investors who expected an aggressive U.S. interest rate cut were disappointed by a more modest move and instability fears continued to weigh on the market.
The S&P/TSX composite index was down 216.65 points, or 1.55 percent, to close at 13,723.71.
The drop wiped out gains seen earlier in the session and came after the U.S. Federal Reserve cut the key fed funds rate by 25 basis points to 4.25 percent.
The central bank also reduced the discount rate it charges banks for direct loans by 25 basis points to 4.75 percent.
While most economists and many investors anticipated a quarter-point fed funds rate cut, some had called for a bolder reduction of 50 basis points as the U.S. copes with tight credit markets and a protracted housing slump.
However, those calling for a bigger cut were seen as being in the minority and the selloff took some observers off guard.
"I'm just very surprised we're getting such a negative reaction," said Glenn MacNeill, vice-president of investments at Sentry Select Capital Corp.
"We've seen pretty rocky markets as fear seems to be dominating the package here," he said, adding he viewed the rate cut as "good news."
The selloff in the resource-laden Toronto market was exacerbated by a sharp drop in the price of gold which also came in wake of the Fed move.
Nine of the TSX's 10 main subgroups moved lower, including the materials group which dove 2.92 percent. Energy issues fell 1.62 percent and financials, sensitive to rate moves, gave up 1.15 percent.
A pair of mining companies were the session's two biggest net losers: First Quantum Minerals (FM.TO) took the top spot, shedding C$4.67, or 4.8 percent, to C$92.70. Inmet Mining IMN.TO was second, falling C$4.13, or 4.6 percent, to C$84.98.
$1=$1.015 Canadian Reporting by Wojtek Dabrowski; Editing by Rob Wilson